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Financial metrics glossary

Operating margin: definition, formula and example

Operating margin is the share of revenue left after paying the costs of running the business — direct costs and operating expenses — but before interest and tax. It is operating profit divided by revenue, and it shows how much each dollar of sales earns from the business's own operations.

Updated

Formula

  • Operating profit = Revenue − Cost of goods sold − Operating expenses
  • Operating margin = Operating profit ÷ Revenue × 100%

Worked example

Sample

SAMPLE · Northbridge Analytics, September 2026

Northbridge Analytics, the fictional software company in the Financial Analyst's public sample, from its P&L for September 2026, the prior month, the same month last year and the plan:

Line Sep 26 Aug 26 Sep 25 Plan
Revenue $163,156 $144,547 $117,890 $145,140
Gross profit $119,154 $101,386 $81,923 $102,463
Operating expenses $181,300 $182,701 $159,359 $169,871
Operating result −$62,146 −$81,315 −$77,436 −$67,408
Operating margin −38.1% −56.3% −65.7% −46.4%
  1. Operating result = gross profit $119,154 − operating expenses $181,300 = −$62,146
  2. Operating margin = −$62,146 ÷ $163,156 × 100% = −38.1%
  3. Change on the prior month = −38.1% − (−56.3%) = +18.2 percentage points

Operating margin, September 2026: −38.1%

The plan for the month was −46.4%: the month came in 8.3 percentage points above it.

How to read it

  • Operating margin sits between gross margin and net profit margin. Gross margin covers only direct costs; operating margin adds the overheads — salaries outside delivery, rent, marketing, software; net margin adds interest, tax and one-off items.
  • Because it leaves out financing and tax, operating margin compares the operations of companies — or of one company over time — that borrow differently or pay tax in different places.
  • A margin that rises while gross margin stays flat means overheads grew slower than revenue. A falling one points to the operating expense lines that moved, which the P&L shows line by line.
  • Read it over several months. Annual costs booked in a single month, such as insurance or an event, can swing that month's margin.

How small US public companies compare (FY2025 10-Ks)

Median
−48.2%
Middle half
−207.4% to −5.3%
Companies
703

All industries, from Ataski's study of the fiscal 2025 annual reports (Form 10-K) that non-accelerated filers with revenue of $1 million to $250 million filed with the SEC: half the companies are above the median and half below, and the middle half fall within the range shown. These are small public companies, not private businesses, so read the figures as a reference point rather than a target.

Operating margin by industry, with the method →

Source: Ataski analysis of SEC Financial Statement Data Sets (FY2025 10-K filings).

Where it shows up in the monthly management report

The report's P&L summary sets the operating result against the prior month, the same month last year and the plan, and its “Key indicators (YTD)” table prints the operating margin for the year to date against the same months a year earlier.

The “Margin: from revenue to result” chart walks from revenue through cost of sales, gross profit and operating expenses to the result, each step labelled with its share of revenue.

  • Open the sample workspace — a fictional company's books, worked by the Financial Analyst, with its monthly report. No signup.
  • The Financial Analyst — what it reads from your accounting system, what the report contains and what it costs.

Frequently asked questions

What is a good operating margin?

Median −48.2% (middle half −207.4 to −5.3%), 703 companies, FY2025 10-Ks: the operating margin of small US public companies, with revenue of $1 million to $250 million and outside finance, insurance and real estate. At least half had a negative operating margin, so treat the median as a reference point, not a target. Above zero means the operations pay for themselves; how far above depends on the industry and how much the business invests in growth.

Source: Ataski analysis of SEC Financial Statement Data Sets (FY2025 10-K filings)

What is the difference between operating margin and gross margin?

Gross margin subtracts only the direct costs of what was sold. Operating margin also subtracts operating expenses — the overheads of running the business — so it is never higher than gross margin.

What is the difference between operating margin and EBITDA margin?

Operating margin is measured after depreciation and amortization; EBITDA margin adds them back. For a company with little equipment the two are close; for one with heavy assets the EBITDA margin is higher.

Is operating profit the same as EBIT?

Often, but not always. Both are earnings before interest and taxes, but EBIT worked up from net income can include other income and expense that operating profit leaves out. Check which definition a figure uses.

Can operating margin be negative?

Yes. When direct costs and operating expenses together exceed revenue, the business makes an operating loss and the margin is negative.